Tsakos Energy Navigation Ltd (TNP) Q1 2019 Earnings Call Transcript
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Tsakos Energy Navigation Ltd (NYSE: TNP)
Q1 2019 Earnings Call
Jun 6, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Thank you for standing by, ladies and gentlemen. And welcome to the Tsakos Energy Navigation Conference Call on the first quarter 2019 financial results. We have with us Mr. Takis Arapoglou, Chairman of the Board, Mr. Nikolas Tsakos, President and CEO, Mr. Paul Durham, Chief Financial Officer and Mr. George Saroglou, Chief Operating Officer of the company.
At this time, all participants are on a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, the 6th of June, 2019.
And now, I would like to pass the floor to Mr. Nicolas Bornozis, President of Capital Link, investment (sic) (investor) relation, advisor of Tsakos Energy Navigation. Please go ahead sir.
Nicolas Bornozis -- Founder, President and Chief Executive Officer
Thank you very much, and good morning to all of our participants. I am Nicolas Bornozis of Capital Link, Investor Relations Adviser to Tsakos Energy Navigation.
This morning, the company publicly released its financial results for the first quarter of 2019. In case, you do not have a copy of today's earnings release, please call us at 212-661-7566 or email us at ten@capitallink.com, and we will have a copy for you emailed right away.
Please note that parallel to today's conference call, there is also a live audio and slide webcast, which can be accessed on the company's website site on the front page of www.tenn.gr. The conference call will follow the presentation slides, so please, we urge you to access the presentation slides on the company's website.
Please note that the slides of the webcast presentation will be available and archived on the website of the company after the conference call. Also, please note that the slides of the webcast presentation are user controlled. And that means that by clicking on the proper button, you can move to the next or to the previous slide on your own.
At this time, I would like to read the safe harbor statement. This conference call and slide presentation of the webcast contain certain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect TEN's business prospects and results of operations. Such risks are more fully disclosed in TEN's filings with the Securities and Exchange Commission.
And now, I will turn over the call to Mr. Takis Arapoglou, the Chairman of the Board of Tsakos Energy Navigation. Mr. Arapoglou, please go ahead, sir.
Efstratios-Georgios Arapoglou -- Chairman
Thank you, Nicholas. Good morning and good afternoon, everyone. Thank you for joining us today.
Well, our results this quarter speak for themselves. They fully justify our business model, once again allowing us to outperform for yet another quarter in the spot market, generating ample revenues for payment of all fleet expenses operating under 97% utilization.
It allows us to reduce debt at the very fast pace, while enabling us to continue our dividend payments and most importantly, maintain a solid cash position. With hands-on cost control and well-structured profit-sharing agreements, TEN is perfectly positioned now to benefit further from improving market conditions.
I have nothing else to say. And I'd like to pass the floor to Nikolas Tsakos.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Thank you, Chairman. And good afternoon to all of you. Good morning.
We are very happy to report a substantially profitable quarter, as we had forecasted at the closing parts of the last one. It's very good to have a follow-on good quarter to a strong performance at the end of the year, which means that we are starting the year on a good foot. And on top of this, we are looking at positive long-term environment for our business, the lowest newbuilding orders in a decade, disruptions arising -- supply disruptions arising from new legislation, which we're all very familiar in 2020. And in this environment, TEN has not only been able to outperform the spot market with our operational and employment strategy, but also to reduce expenses.
We have a 9% reduction of operating expenses. We should not forget that sometimes when things are very rosy on the income side, you people tend to forget the defense part of the business, which is we always have to keep operating expenses on watch. We have the luxury to run an organization with on-hands management, and we are able to follow our expenses budgets very closely and sometimes also with the budget by reducing expenses even further.
On top of this, the thing that we do not -- I would say talk about enough is that we are reducing debt by almost $2 a share year-after-year, which means that although we are right now very close to the completion of our newbuilding program of $1.4 billion, of which $250 million left. And all of it financed -- fully financed, with a very small portion of CapEx remaining. We are able to be reducing debt.
If you look back in 2017 and early '18, our debt was approaching the $2 billion mark according to -- right now we are at close to $1.6 billion and going down very quickly to $1.4 billion. And in the next couple of years, breaking a $1 billion debt level. So, I think this is another additional positive for the company that we do not tend to discuss as much.
It has been a very productive period. We were able to take advantage of the low market over the last three years. And besides, trying to be countercyclical as our CEO is going to talk about and purchase vessels at the low cycle levels, we're almost done without the -- with our program. And on top of that, we have not left out the DNA of TEN, which is long-term relationships and strategic alliances. And we are very happy and proud to increase our strategic alliance with a major end-user by adding two more vessels to that.
And I mean, this would bring the relationship to seven vessels with long-term employments with three years of employment with significant profit-sharing arrangement. In this environment, I think the only thing that we are not satisfied with or the opposite is the share price. But we hope that our results are going to make this happen at the end.
And with this, I would ask our COO, Mr. Saroglou, to give us a brief update of what has happened in the last six months.
George V. Saroglou -- Chief Operating Officer
Thank you, Nikolas, and good morning to all of you. We are very pleased to report the profit on the first quarter as a result of a strong freight market environment that started during the fourth quarter of last year. In comparison with the first quarter of 2018, the improvement is 200%.
The recovery in both the tanker and LNG markets helped the company recharters the two LNG vessels in the fleet at much higher accretive rates. And continue to charter and recharter 10 vessels so far since the start of the year by taking advantage of the appetite by oil majors and the company's clients to fix vessels forward.
In the last three years, the company built 19 tankers against long-term industrial business. 10 is in the final stages of this 19 vessel growth program undertaken at competitive levels during the low parts of the cycle. Of these, 15 ships have been successfully delivered, financed and employed on long-term accretive charters to first class end-users.
Within this years in 2020, the remaining four vessels, all fully financed and chartered to major oil concerns for a minimum of five years, will complete the company's current expansion and seek new revenues going forward. The main driver behind the market's strength since the start of the fourth quarter of last year are; strong global oil demand, growing year-over-year in excess of 1.3 million barrels per day, a growing global oil economy, despite headwinds and fears of slowdown from tariffs and trade wars, strong crude oil exports from the United States of America, currently in excess of 3 million barrels per day in the last three weeks out of four weeks reported by the agency of the United States, which is almost doubled from last year exports.
All this adds to both tonne miles and global fleet utilization. The political tensions, supply disruptions and the US led sanctions against Venezuela and Iran has created the need to -- for substitute barrels. And these substitute barrels travel longer distances to reach importers, refiners, consumers, adding again to tonne miles and global fleet utilization.
We have limited vessel supply, as the global tanker fleet has little growth in 2018, thanks to the higher scrapping levels since 2012. The upcoming IMO 2020 regulation should further reduce vessel capacity, as we have up to 5% of the global fleet that has elected to retrofit scrubbers. We have the practice of slow steaming for everybody, gaining support and could be mandated, and also the possibility of phasing out of all the tonners in order to avoid compliance with both water ballast treatment system installation and 2020 compliance, which could keep scrapping at high levels.
The company started to fix most of the vessels in the fleet in a combination of medium to long-term fixed and variable rates and charters, have served the company well as slide three in our presentation shows. And helped TEN vastly outperform the spot rate market during low to mid-cycle periods while maintaining healthy returns during peak cycles as we serve a significant part of the upside with charterers when the market goes through an extended rally.
In slide three, in our online presentation, we see the actual performance of the different type of vessels we operate against the spot market during the first quarter of this year and last year. We have outperformed the spot market by over 5% this year and over 40% during last year.
Slide four, we have the left side, which presents the all-in breakeven cost for the various vessel types that we operate in TEN. As you can see, the cost base of the fleet is low. In addition to the low shipbuilding cost, we must highlight the purchasing power of the company's technical managers, Tsakos Columbia Shipmanagement and the continuous cost control efforts by management to maintain a low OpEx average for the fleet.
This quarter, fleet OpEx is down almost 9%. Low general and administrative expenses while at the same time, we keep a very high fleet utilization rate quarter-after-quarter. Again, over the first quarter of 2019, we report 97% which we believe qualifies as full employment.
As we mentioned in slide three, TEN's flexible chartering strategy ensures that most of the time the company outperformed the spot market and that helps the company maintain an impeccable debt service record. We currently paid (ph) down debt at an average rate of $12 million per month and meet all our obligations irrespective of where we are in the market cycle.
Thanks to the profit-sharing element that is a big portion of the fleet, TEN benefits further when market conditions improve like in the last two quarters. Based on the current market conditions and the number of vessels operating in the spot market and in time charters with profit sharing, for every $1000 increase in spot market rates, we have a positive $0.06 impact in annual per share, impacting annual EPS.
Slide five, we have the pro forma fleet as it's currently employed. We have 31 vessels on fixed rate times charters, while 37 vessels, plus four, 41 in total and these four are opening vessels during the year, or 60% of the combined pro forma fleet has spot market exposure in a combination of pure spot COAs and time charters with profit sharing and min/max formulas. On average, we have 2.2 years of employment already fixed and a backlog of $1.2 billion in minimum contracted revenue.
Global oil demand continues to be strong. Last year, it grew by 1.2 million barrels a day and the forecast for this year is to grow another 1.3 million barrels per day. Despite the softness we currently experience as we move from the first quarter to the second quarter as a result of seasonal refinery maintenance in order for refineries to switch from winter production of heating oil to summer production of gasoline and the preparation for IMO 2020 compliance, the oil price currently appears to be in a comfortable price zone, good for both consumer demand and stockpiling.
The market expects OpEx and the allies (ph) to gradually increase production, sometimes in the second half of the year in an effort to keep the oil market balance against further disruptions from supply outages, sanctions and/or geopolitical tensions.
On the supply of tonners, the order book is currently at 8.3%, which is low compared to historical levels. A big part of the global fleet is over 15 years and incoming regulations starting with retrofitting water ballast treatment systems from this year and compliance with IMO 2020 would withdraw vessels from the global fleet and push more tankers that are currently approaching or are above 20 years to go for scrapping.
This is reinforced in slide eight, which presents the scrapping over the last few years. Again, we must highlight that last year was the highest scrapping year since 2012. The overall tanker fleet growth in the next two years to three years is expected to remain in check, below 3% (ph) and hopefully declined.
The graph nine, we see here on the right side of the slide, a forecast from Fearnleys, a well-known shipbroker from Norway. As you can see, VLCC rates are expected to trend higher from the second half of 2019 and reach multi-year highs going forward.
We are also positive about the market prospects and expect a strong market for all vessel categories. In this environment, we believe that the company's fleet is well-positioned to capture market opportunities -- any market opportunity that will be present.
That concludes the operational part of our presentation. Paul will walk you through the financial highlights for the first quarter. Paul?
Paul Durham -- Chief Financial Officer
Thank you, George. Well, following a strong quarter four, we were pleased to enjoy an even stronger quarter one with revenue of $147 million, a 17% increase, leading to operating income five times higher than in the prior quarter one and resulting in a net income of $11.2 million. Both (ph) vessels accounted for a quarter of the fleet with crewed vessels especially well-positioned to capture rates on average double those earned in the prior quarter one.
Total time charter hire amounted to over $87 million. Again, enough to cover all fleet operating costs, overheads, chartering costs and cash payments expenses, leaving a surplus of $15 million. Spot revenue provided a further $31 million despite higher fuel prices. Our product carriers while not taking off to the same extent, we are still better than average market rates. The average daily TCE rate per vessel achieved by the fleet was $21,000, a 19% increase.
The two LNG carriers together generated over $3 million, more than in the prior quarter one as a result of new more lucrative time charters. Total OpEx fell by 9% due to tight cost control and a stronger dollar. Daily OpEx per vessel fell 7% to almost $7,500, while daily overhead per vessel fell by 4%. Finance costs were down 2%, with rising interest rates being offset by the effect of lower average outstanding loans.
Our balance sheet remains strong with over $119 million cash at March 31st. And cash flow from time charters remains secure with quarter one EBITDA at $64 million, over 50% higher than in the prior quarter one. This comfortably allows us to redeem our B Series of preferred shares, and to pay our remaining dividend for the year. And of course, as George just mentioned, to continue our perfect debt service.
Debt continues to fall rapidly with $150 million repaid over the past year, bringing net debt to capital to 48%. Another $37 million will be repaid in quarter two. We believe our strength in quarter one results bodes well for our 2019 performance, although there may be refinery disruptions as preparations begin for meeting IMO requirements.
Ultimately, we expect such disruptions and preparations to lead to a still more promising market for both crude and product carriers later in the year. So, good news all around with increased revenue and profit, decreasing costs, rapidly declining debt and positive prospects going forward.
And on this happy note, I'll hand the call back to Nikolas.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Thank you, Paul. And I think it's always very important to remember that there's not much we can do about the market. But from our side, there's a lot we can do on our operating expenses. And I think this organization with the help of the Tsakos Group is focusing on not forgetting that even in a good market, in a positive market, operating expenses are very, very important for our bottom line. And I think we need to again congratulate the team for reducing by 9% our operating expenses.
And also on our chartering policy, where last year we were able to outperform the spot market by 40% and already this year, we are doing the same by 5% in the first quarter and naturally growing as we go on, since we are seeing that our chartering rates are well above the spot markets today. However, the expectations that not all charterers are looking forward (inaudible), as George said, for a very strong second half or the year. And we want to thank our Chairman for your good words, and we will continue trying to produce better results.
And with that, Nick, I would like to open the floor to any questions. Thank you.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Thank you. We will now take your first question. Please go ahead. Your line is open.
Randy Giveans -- Jefferies -- Analyst
Hey guys. This is Randy Giveans with Jeffries. How are you?
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Hi, Randy. Good.
Randy Giveans -- Jefferies -- Analyst
Good. Good. Few quick questions to you. So first, noticed the reintroduction of semi-annual dividend payments. So, you can talk about the reasoning behind that. What would the payment be? I guess now $0.10 per share twice per year and any guidance to possible increases to that number.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Yes, I think -- well, as you know because you're one of the -- you and Jefferies have been with us for many, many years. We have always been paying a semi-annual dividend until about five years ago when we decided to go to quarterly. Then on top of that, we have not seen any real improvement helping our share price or the operation.
And as you know, having a couple of preferreds out there is about (ph) paying quarterly. We have to do, I think very good housekeeping. And it fits a shipping corporation much more to look at the results. Our aim is, of course, to maintain, as we said in the press release, the same payout. So yeah, hopefully, we can do $0.10, at least $0.10 payment but twice a year. But hopefully, the market that these were supposed to go, we can increase that also.
Randy Giveans -- Jefferies -- Analyst
Sure. Okay. And then you mentioned, you reduced debt by $150 million in the first quarter of last year. What is your expected kind of debt reduction for 2019 and 2020?
Paul Durham -- Chief Financial Officer
Overall, in 2019, we expect a reduction of $122 million. And going into 2020, it will be about $170 million.
Randy Giveans -- Jefferies -- Analyst
$121 (ph) million. Excellent. And then one more question just on kind of the market. Slide nine, you show a very bullish expectation for VLCC spot rates, which we concur with, especially for the back half of this year. However, you have no VLCC spot exposure until the very end of this year when one-year VLCCs comes off its time charter. I think it's in November. So, how do you plan on taking advantage of this market strength? Is it possibly acquiring some second-hand vessels or maybe even time chartering in some VLCCs for one, two years, three years?
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Yes. I think our redemption and perhaps you know that our contracted vessels are on profit sharing.
Randy Giveans -- Jefferies -- Analyst
Sure.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
I think that will help, at least get a significant part of that upside. And we are also looking to recharter the vessel, which is opening up and as you rightly said in September, so it will be a very good timing for that ship. And we are looking for some -- resales for second-hand VLCCs as we currently speak. So -- and also the VLCC, this is an indicator of the remaining of the market. Usually, as you know when the VLCC market moves, then it brings up really the Suezmax and the Aframax via other categories, mainly on the crude.
Randy Giveans -- Jefferies -- Analyst
Sure. Sure. Okay. Well, hey, I'll turn over. Thanks, again, and congrats on the profitable quarter.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Thank you.
Operator
(Operator Instructions) Thank you. There are no further questions at this time. Please continue.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Okay. Well, again, thank you very much for following the company. We are looking for the remaining or for the six months to be able to -- within the summer to announce another profitable quarter and profitable six months. We are preparing the company. As we said, we have complete -- we are almost at the end of a 19 vessel newbuilding program.
Those 19 vessels, we have taken delivery already and fully financed and fully employed 15 of them. Four of them are coming. The first one in October of this year and one every quarter in 2020. We expect just from those ships and maybe debt of about $150 million on an investment of about $1.3 billion. So, we have positioned the company in the difficult market, ready to take advantage of what we hope will be a significant super cycle going forward. And having achieved a good employment results, operating expenses going down. As Paul said, our debt has been reducing significantly. The only thing now, we need to increase is the share price. We hope this year will be the result of that.
And with that, I will ask our Chairman to say some final words.
Efstratios-Georgios Arapoglou -- Chairman
Well, thank you all. As I said, results speak for themselves. And I'd like to congratulate Nikolas and his team. And looking forward to a better performance going forward into 2019. Well done.
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
Thank you.
Operator
Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.
Duration: 29 minutes
Call participants:
Nicolas Bornozis -- Founder, President and Chief Executive Officer
Efstratios-Georgios Arapoglou -- Chairman
Nikolas P. Tsakos -- Founder, President and Chief Executive Officer
George V. Saroglou -- Chief Operating Officer
Paul Durham -- Chief Financial Officer
Randy Giveans -- Jefferies -- Analyst
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